updated 06:45 pm EDT, Tue April 10, 2012

Offices in Ireland, Virgin Islands for lower rates

British tabloid newspaper The Daily Mail has accused several leading technology companies, including Apple, of dodging their fair share of UK taxes by setting up operations only in parts of that nation that offer lower-than-average tax rates. The charges were triggered by an investigation of online retailer Amazon, which switched its European headquarters to Luxembourg and ended up not paying a penny in British corporation tax for the past two years.

The corporate rate in the UK is 24 percent, but companies like Apple and Google have set up shop in Ireland instead, where the tax rate is half as much, or 12.5 percent. Apple also has offices in the British Virgin Islands, where it sends a lot of its foreign-made money. Google also bases its headquarters in Ireland, and is said to funnel UK money through the Netherlands and Bermuda in an effort to lower taxes.

None of the companies have yet been accused of anything illegal, but are taking maximum advantage of existing tax loopholes in order to minimize their tax liability. Apple pays around a 25 percent tax rate in the US, according to financial records listed by the company. The rate is below the top rate of 35 percent, but few large corporations actually pay the full rate. Many (most notably Exxon and GE) have paid far less, sometimes going as far as paying no federal taxes at all, or a negative tax rate when government subsidies are factored in.

Apple Retail U.K. Ltd., which is based in London, managed to pay only a 0.75 percent tax rate on sales of 500 million pounds ($793 million), paying only £3.79 million ($6 million). Apple's other primary UK business Apple (U.K.) Ltd., paid an effective 9.5 percent rate on income of about $109.5 million in sales.

All told, the Mac maker is estimated to have made about $6 billion in sales from the UK region, or about 10 percent of its revenues in 2010, and only paid around $15.9 million in taxes, an effective rate of 0.1 percent. The outcry from the public over corporations having the resources to dodge taxes and escape liabilities for losses has sparked protests worldwide, particularly in Ireland, Iceland, Spain and Greece where the government has been forced into austerity measures due to financial crises seen by the people there as having been caused by corporations.

In the US, similar sentiments have been the impetus for the "Occupy Wall Street" movement, which blames the top one percent of earners and corporations for wielding influence to pass legislation favorable to themselves and harmful to the middle class and poor, or "the 99 percent." Even well-regarded companies such as Apple have taken criticism for lobbying the deficit-ridden US government for "repatriation" tax incentives that corporations want for bringing in foreign earnings into the US at a lower-than-normal tax rate.

Apple's recent dividend and stock buyback plans were carefully constructed to use only money earned in the US so as to avoid repatriation, which CFO Peter Oppenheimer told investors was currently saddled with a strong "disincentive" to bring the money into the US, where it would be taxed at the current corporate rate of around 35 percent. The Obama administration and Congress have been resistant to the calls from corporations, including Apple, to allow a repatriation "tax holiday" of around five percent, instead proposing to lower the corporate tax rate overall to around 25 percent, but with fewer loopholes and more penalties for businesses that stash profits offshore.

To be fair

I think the feeling in the UK, as some feel in the US, is that the system of paying taxes has been rigged so that normal citizens cannot avoid the punch, but big companies can. Warren Buffet himself says he pays a lower percentage of income tax on his income than his secretary does on hers.

While the story (originally written by a tabloid, let's not forget) makes Apple out to be the bad guy, they are (as you point out) just taking advantage of the way the law is written. But that doesn't mean the law isn't flawed and needs review. In these days when corporations pretty openly buy congresspeople, bad law gets passed that is fundamentally unfair. Call it "corporate welfare," it's pretty easy to find egregious examples.

In my own opinion, what people are really saying, from Greece to the US, is simply this: the system of monetizing politics isn't working anymore. The system is broken.

They are also just talking about corporation tax

The Apple companies domiciled in the UK will also be contributing to tax revenues through employment taxes and VAT (sales tax). Now, while it is in reality the consumer that pays the VAT that is just semantics because the consumer also pays the profit that would create a corporation tax liability.

And, let's not forget, the Irish government is very pleased to have Apple located in Cork because of the jobs it creates there, which generates employment tax revenue not to mention further taxes when employees spend their salaries to support other jobs and pay VAT.

As others mention, if it's legal and an advantageous strategy for a company (it isn't always) then they are going to do it, just like an individual would.

Warren Buffet and his secretary

WB pays a lower rate because congress set taxes on capital gains lower than on other income, in order to encourage investment. Anyone, whether they're in the 1% or the 99%, pays the same capital gains rate (unless, like me, they do most of their investing inside a standard IRA, because capital gains earned in an IRA are not taxed when earned; when the earnings are distributed from the IRA, they are taxed as regular income).